The US Federal Reserve is a special kind of schizophrenic. It exhibits all the key traits, ranging from delusion to bizarre behaviour. At its head sits Janet Yellen, the Fed’s mercurial chairwoman.
If it was a living entity, the Fed would have been diagnosed with bi-polar long ago. How else could we explain its erratic behaviour? The Fed is almost purposely misleading in what it says, to the point of outright mischief.
Overnight, Ms Yellen was at it again. Dishing out the kind of ambiguous nonsense we’ve come to expect from her. Keep in mind, this is arguably the most powerful woman in the world. President Obama has nothing on her. Yellen holds power over global markets in a way that Obama never could. Her words can send markets into a tailspin. It’s just a shame her deceptiveness shines so brightly whenever she speaks.
Yellen plays the markets like a fiddle, and this time was no different. She spoke of a US economy that was performing well. Of a labour market that was improving significantly. She indicated that there was no decision on a December move. And that, in typical fashion, data ‘would be monitored’. Yellen maintained the economy would justify a gradual rate tightening.
All of which sounds like a certain rate hike in December, right? You’d think so…
Janet Yellen – The Puppet Master
Markets latched onto Yellen’s comments hook, line and sinker. The odds for a rate hike rose to 58%, up from 52% prior to the speech. Stocks, commodities and bonds all took a hit as expected.
But someone forgot to remind gullible markets that every Fed announcement comes with a disclaimer. Yellen indicated that if the US economic outlook worsened, the Fed might consider lowering rates.
But isn’t the economy swimming along? Is the labour market not improving? Why add that if things are so jolly? Because, as the Fed knows, there’s always potential for mishap.
The US economy added 182,000 jobs in October. The manufacturing sector is shedding jobs, but services are up. If nothing else, it signals a slight improvement in the US jobs market. But there’s always the chance that labour conditions will worsen. In September, the labour market missed expectations by some 60,000 jobs. When those figures came out, no one was talking about a rate hike. Now a month later we’re meant to be bullish on the US economy.
What’s the point in flipping the argument 180 degrees one month later? The US labour market needs to show steady signs of continual improvement. Because, as the Fed knows, things are never as great as they might seem. The economy may appear sound during any given month. But it’s not structurally sound, which is what really matters.
Japan was in a similar situation back in the early 2000s. Its economy was struggling with low growth and deflation. And they had rock bottom interest rates, like the US has now. The Bank of Japan ‘lifted-off’ by hiking rates 0.25%. And guess what happened? Seven months later, the BoJ cut rates back to zero.
It tried again in the mid 2000s, just in the lead up to the financial crisis. That experiment didn’t last long either. Japan’s cash rate was back at zero by 2010.
Just like the BoJ, the Fed knows that negative interest rates (NIRP) are a viable alternative to hiking. But contemplating NIRP is telling in itself. It shows the kind of organisation we’re dealing with. An organisation that wields so much influence, but has no seeming direction or purpose.
Yellen reckons NIRP would encourage banks to lend more. And just to throw everyone off, she added that she sees no need for such measures just yet. How reassuring…
Maybe she’s right. After all, the US economy is improving. The Fed tells us so, so it must be true. Why would they mislead the public?
Will God chime in on US interest rates?
There was another bizarre outcome from the debate on interest rate policy coming out of the US. House of Representatives member Brad Sherman struck a chord with this doozy:
‘If you [Yellen] want to be good with the Almighty, you might want to delay until May. God’s plan is not for things to rise in the autumn, that is why it is called fall’.
You’re probably shaking your head at that. Even the pious among you probably find it one step too far. That was my initial reaction too at first. But the more I thought about it, the more Mr Sherman’s point resonated.
At least God’s plan makes sense, right? He’s sticking to a timetable. There’s nothing misleading about a US-springtime rate hike. However loose the logic is, there is something to be said for it. That’s more than we can say for Yellen and her cronies at the Fed.
But there’s another theme in there that, God aside, makes a good point about US rates. It may not be God deciding on the timing of rate hikes, but next year is a good a bet as any for lift-off. There was a recent chart (see below) showing how bearish Fed members had become on rate hikes in 2015. From an almost unanimous rate hike go-ahead in June, some members got cold feet by September. The mood in general, among the 17 policymakers, became more dovish. One member even predicted the dreaded NIRP starting as early as this year.
[Click to enlarge]
In any case, we can thank ‘God’ the Fed doesn’t dictate Australia’s rate policy. Even if, one way or another, its decisions influence our future.
Our very own RBA shares some of the Fed’s flip-flopping tendencies. But even the RBA takes a more dignified approach in how it circulates its message. In the case of Janet Yellen, there appears to be no rhyme or reason to anything she says.
Ultimately, you can expect to see US interest rates rise in December. Or not. No one really knows. Not even Janet Yellen. God may not dictate US interest rate policy directly, but we can be glad he didn’t dump Ms Yellen onto us.
Contributor, Markets and Money
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